Blockchain adds traceability and transparency to the supply chain

To succeed, marketplaces must create trust for buyers and sellers to conduct trade with parties they don’t know and eliminate the friction in traditional trade processes. Blockchain provides tamper-proof traceability, transparency and automation. So does that make it an ideal framework for marketplaces to achieve these objectives more effectively and efficiently?

Chinese police seized an estimated 50,000 bottles of counterfeit Penfolds wine, a premium Australian brand, in March 2018. Only four months earlier, 14,000 bottles of fake Penfolds were confiscated, following complaints by Penfolds’ owner, Treasury Wine Estates, to e-commerce giant Alibaba after Penfolds noticed that some Alibaba retailers were charging suspiciously low prices for its wines.

Food fraud is a major challenge globally, costing the food industry an estimated US$40 billion (€34 billion) per year while damaging brand reputations and creating food safety issues. In the case of alcoholic beverages, some counterfeiters even have been found guilty of mixing toxic industrial chemicals into the beverages they sell, to increase volume.

As a digital marketplace provider, food fraud is a threat to Alibaba too, which has teamed up with four Australian and New Zealand companies to pilot a food-tracing system, the Food Trust Network, in Alibaba’s B2C marketplace Tmall. It’s a system based on blockchain technology, a distributed database originally developed to bring traceability and security to digital currencies. Now blockchain technology is being applied to bring tamper-proof traceability and transparency to supply chains as well.

“BLOCKCHAIN IS ‘ABSOLUTELY TAILOR-MADE NOT JUST FOR SUPPLY CHAINS, BUT FOR GLOBAL TRADE VIA MARKETPLACES.”

MICHAEL CASEYMIT MEDIA LAB ADVISOR AND AUTHOR

Blockchain is “absolutely tailor-made not just for supply chains, but for global trade via marketplaces,” said Michael Casey, MIT Media Lab Advisor and the author of The Age of Cryptocurrency: How Bitcoin and the Blockchain are Challenging the Global Economic Order, and The Truth Machine: The Blockchain and the Future of Everything. “Blockchain is all about data verifiability and enabling trade between mistrusting parties.”

TAILOR-MADE

Jonathan Behar, CEO of Blockchain Masterclass, a Paris-based blockchain training company, and a former marketplace entrepreneur, believes that blockchain technology could simplify security on marketplaces while ensuring trustworthiness of the goods they sell.

“The way this trust issue is handled now is that marketplace operators do a lot of upfront qualifying of buyers and sellers and then turn the process over to the user community, which provides ongoing vetting through ratings and feedback,” Behar said. “Other marketplaces, especially C2C ones, rely completely on community vetting. This vetting applies to products as well as people, with blockchain providing concrete data to help assess the quality, authenticity, safety or sustainability of products.”

TOO SOON?

Given these advantages, should all companies consider integrating blockchain into their supply chain management systems? Casey says no, at least for now.

“It’s helpful to think of blockchain as more of an infrastructure like the internet or a telecom network than as a type of database,” Casey said. “And this particular infrastructure, this new form of bookkeeping, is not yet standardized and easily tapped into.”

Casey said the main challenge is the existence of ‘permissioned’ and ‘permissionless’ blockchain models. Permissionless blockchains are public systems, like the internet, developed to support cryptocurrencies. Permissioned blockchains are private adaptations of these public models, and they are used to bring greater efficiency and transparency to its supply chains, yet maintain a gatekeeper role over the system as a whole.

“For blockchain to work as a global bookkeeping infrastructure that can support fluid-demand chain dynamics anywhere in the world, it has to be a single, commonly agreed upon, permissionless system,“ Casey said. “It can’t be managed by a single centralized institution, like a bank or large company. It has to be spread across a decentralized network of independent computers, with mathematical rules and cryptography guaranteeing the ledger’s integrity.”

At this stage, Casey said, using blockchain requires resources and skills that only very large companies have. “But as it expands and matures and core issues like standards and efficient scaling are addressed, it will likely be something all supply chain actors can tap into.“

But blockchain’s highest value, Casey said, will remain its ability to ensure trust among strangers doing business together. “And that happens on public marketplaces, where the ‘cost of trust’ is highest. The cost of trust is the massive level of recordkeeping we do in multiparty supply chains. Blockchain alone can lower this cost, and it could do even more if combined with smart contracts and Internet of Things technology.”

SMART TECH

Smart contracts are self-executing contracts written in software code and stored in blockchain networks. They auto-execute actions – transferring money, initiating shipments, issuing refunds – in response to specific events being recorded in the blockchain ledger.

“IoT sensors can autonomously detect and record events – like a package being loaded on a truck, or a storage temperature threshold being exceeded – in real time, making marketplace automation much more pervasive, and visibility much more granular,” Casey said.

Will cryptocurrencies also play a role in the future of marketplaces? Behar thinks they will.

“Cryptocurrencies are already embedded in blockchain systems as tokens, so there’s no overhead to using them as the digital currency for platform transactions,” Behar said. “There’s technology now that can manage exchange rates, and using cryptocurrencies can lower costs by cutting out financial middlemen in marketplace trading. It also supports micropayments, helping marketplaces extend trade opportunities to micro-entrepreneurs in developing economies.

Marketplaces are all about widening participation, Behar said. “They are the future of commerce, and blockchain can help them realize the vision of helping people and companies – big and small – ‘make/buy it anywhere, move it anywhere, and sell it anywhere.’”